MORE ON INHERITED IRAs AND CREDITOR PROTECTION

Our post from yesterday here discussed how the U.S. Supreme Court ruled in Clark v. Rameker that inherited IRAs are not exempt from creditor claims in bankruptcy. Here are some more observations on that case:

• Those states who opt out of the Bankruptcy Code exemptions in favor of their own exemptions, may still have an exemption for inherited IRAs. This is because Clark only addressed the federal exemptions applicable in non-opt out states. Debtors in those states providing explicit protection to an inherited IRA should be unaffected by Clark and thus their inherited IRAs should still be protected. One of these states is Florida. Other states which I have read (but not confirmed myself) that have similar exemptions include Alaska, Missouri, North Carolina, Ohio and Texas.
• The problem with relying on such a state law exemption in planning is that one does not know where the beneficiary who will inherit the IRA will be living at the time of a future bankruptcy. That is, how does one know for sure they will be residing in an opt-out state that has an explicit inherited IRA exemption? Thus, trust planning to avoid the Clark exposure might still be a good idea.
• The ability to “stretch” out an IRA payment may be contrary to the creditor aspects of the trust – as noted in our earlier posting the trust provisions must be coordinated both with creditor protection objectives and IRA qualification requirements.
• Some are suggesting that in those states that do not have an inherited IRA exemption, but do have creditor protection for annuities, that the conversion of an IRA into an IRA annuity perhaps may be a way to obtain creditor protection in light of Clark.